A “surprise” oil production cut and the price cap falling apart, it was only a matter of time until the petroleum markets broke out, states Phil Flynn of PRICE Futures Group.

The Saudi Energy Minister Prince Abdulaziz bin Salman warned oil traders and governments not to mess with the oil market or they would be “ouching like hell”. Now it appears that over the weekend we have the revenge of the pariah state and the Biden administration, along with US consumers, will be "ouching like hell."

OPEC led by Saudi Arabia, which has shown its displeasure with the Biden administration and their misuse of the Strategic Petroleum Reserve, was reportedly angered by comments by Energy Secretary Jennifer Granholm that they had no plans to buy oil back to refill the reserve even as the Silicon Valley Bank failure caused oil liquidation and had oil fall below $70 a barrel. That is the area where the Biden administration said they would be buying oil back. So, in response, Saudi Arabia and the rest of OPEC plus producers said they would cut oil production by about 1.116 million barrels a day.

Saudi Arabia announced that they would cut production by what they called a “voluntary reduction” of 500,000 barrels a day from May first and other OPEC members are joining in. Algeria says that they are going to cut by 48,000 barrels a day. The United Arab Emirates is going to cut production by 144,000 barrels a day from May until the end of 2023. That is on top of their previously agreed production cut of 2.0 million barrels a day.

The Wall Street Journal reported that Russia nominally is part of Sunday’s action, but its output cut—500,000 barrels a day—was announced weeks ago and was likely involuntary, as the damage to its economy from sanctions and the war deepens. Russian officials said they were extending their production cut for the entire year. Russian government revenue has been squeezed, the country’s biggest exports, gas and oil, have lost major customers, and the ruble is down more than 20% since November against the dollar.”

Yet I am not so sure the Journal is totally correct on this. The reality is there are signs that Russia has successfully found new customers for its oil, mainly China and India and even Japan is buying Russian oil above the price cap. In fact, the Wall Street Journal also reported that Japan asked the US for an exception to the price cap. Now with OPEC reducing output, there will be more countries desperate for oil, and adherence to the price cap will lead to shortages or the whole price cap mechanism will fall apart. Kremlin spokesman Dmitry Peskov said that oil production cuts were intended to keep “crude oil and petroleum product prices at a certain level.” The production cut “is not recommended at this time” according to the White House but the statement was a far cry from when the Biden administration vowed “serious consequences” if the group cut production.

Yet let’s face it, this production cut is a slap in the face to the Biden administration. The administration vowed to make Saudi Arabia a pariah state and is now back to begging OPEC not to cut production. The Biden administration’s energy policy has discouraged US drilling and production and has allowed OPEC to have the power to snub the US and its oil needs. Biden’s amateurish handling of foreign affairs has left the American people in a more vulnerable state.

The upheaval in the market from weak energy policy continues. Reuters reports that “Russia’s largest oil producer Rosneft (ROSN.MM) and India’s top refiner Indian Oil Corp (IOC.NS) agreed to use the Asia-focused Dubai oil price benchmark in their latest deal to deliver Russian oil to India, three sources familiar with the deal said. The decision by the two state-controlled companies to abandon the Europe-dominated Brent benchmark is part of a shift of Russia’s oil sales towards Asia after Europe shunned Russian oil following Russia’s invasion of Ukraine more than a year ago.” The cut comes as USA oil inventories may start to fall dramatically. We expect that crude supply could fall this week by four million barrels and oil prices, like gasoline, will fall by two million barrels and distillates by 2.5 million barrels. Refinery runs should increase by 0.5.

ArgusMedia reports that Northern Iraq’s KRG has reached an “initial agreement” with Iraq’s federal govt to resume #crude exports from the north of the country this week, head of the #KRG’s foreign media affairs. That would have been bearish before the OPEC cut. Now, not as much. This is not good for gasoline prices. With supply below normal and tight supplies of gasoline additives, it will make us all pay at the pump. AAAS shows regular gas prices at $3506 up from 343.9 a week ago. Look for further price spikes in the days ahead.

The natural gas meltdown continues. EBW Analytics says that after the April contract rolled off the board below $2.00/MMBtu last week, the May contract is rolling down amid a combination of soft Henry Hub spot prices, weakening April weather, and signs of a post-winter supply bump adding to a swelling South-Central surplus. Over the weekend, major weather models lost nearly 20 gHDDs within the one to 15-day window. DTN’s forecast is down nine gHDDs, another bearish blow at the front of the NYMEX curve. With technical also bearish, further near-term price weakness appears probable.

Learn more about Phil Flynn by visiting Price Futures Group.